PRODUCT MARKET STUDY

AIR-CONDITIONERS AND PARTS

MATRADE JEDDAH

PRODUCT MARKET STUDY: AIR-CONDITIONER AND PARTS 1. INTRODUCTION

Due to its extreme hot and dry weather, Saudi Arabia remains one of the most rapidly growing markets for air-conditioner and parts. Robust construction activities in the kingdom are another factor that raises the demand for air-conditioners. This study is aimed to get information on market potential of air-conditioners in Saudi Arabia with view to encourage our Malaysian manufacturers and exporters to capture bigger share in the Saudi air-conditioner and parts market. 2. OVERVIEW OF THE MARKET

Saudi Arabia is experiencing a boom in real estate and construction activities in which many new buildings for commercial as well as residential are coming up day by day. Virtually all new houses and office buildings constructed in Saudi Arabia require some form of climate control and air-conditioning system. Besides, high liquidity and growing disposable income encourage owners of buildings, houses and offices to spend more on top-notch air-conditioning system which could endure Saudi Arabias hot and arid climate. Saudi Arabias air-conditioner market was worth US$693 million last year and is expected to reach US$748 million in 2007 and US$1 billion by 2011. Although the kingdom does produce air conditioners domestically, it satisfies slightly over 30 percent of the demand through imports. The market size is growing on an average of 6 to 7 percent annually. Characteristics and Trend Majority of the demand for air-conditioners (AC) in Saudi Arabia has been satisfied through local production. Locally produced air-conditioners are mostly OEM of wellknown brands by customers in the market for many years. Saudi Arabia imposes a 12 percent custom tax on imported air-conditioners in order to protect its local AC industry. Besides, locally produced AC has advantages over imported ones in the sense that it could offer faster delivery and better after-sales service due to easily available stocks, parts and components. The Saudi AC market has become extremely price-conscious over the last few years as competition among distributors and retailers has increased. Local dealers and buyers of air-conditioner and parts usually look for products of competitive prices, good quality and reliability. The most prevalent type demanded is the split unit air-conditioner. This kind of AC is comparatively less noise than window-type air-conditioners. Japanese, Korean and other Far-East producers focus on this AC type which has contributed to the upsurge 1

in their sales. The main quality required is that air conditioners could work in a very high temperatures and harshest environments. Local Production There are currently 28 factories for air-conditioning related industry in Saudi Arabia. Three of them are considered major air-conditioner manufacturers producing different types of air-conditioners from wall-mounted, split unit, as well as window types. All these manufacturers are usually assembly plants for OEM (original equipment manufacturing) products which depend on import parts mainly from US. Al Zamil Air Conditioners (ZAC) is the largest air-conditioner manufacturer in Saudi Arabia. ZAC has a 75,000 sqm plant which produces over 2,200 units per day. Current production capacity is in excess of 600,000 units per year (window units, mini split units, reciprocating chillers and packaged unit). Saudi Arabia and other GCC countries are the main markets for ZAC, contributing nearly 75 percent of its sales revenue. It holds 27 percent market share in the Gulf market. ZAC does OEM for branded air-conditioners from Sanyo, Friedrich, Luxaire, Philco, Admiral, Siemens Bosch, Trane and Supra. It also has its own local brands such as Classic and Cooline. The second company is Middle East Air Conditioners (MEAC) based in Dammam. MEAC is a joint-venture between Zamil Industrial Investment Company (ZIIC) and GE in the manufacture and marketing of a range of air conditioners. MEAC markets window-type room air conditioners (RAC) from 1.5T to 2T, wall-mount split units up to 3T and ducted split systems extending to 5T. Their brands are GE, Hotpoint and RCA. Its daily output is up to 2,400 RAC units and 300 split units. The third major manufacturer is Saudi Air Conditioning Manufacturing Company based in Jeddah. This company is belongs to Al Juffali Group. It does OEM for Carrier, Kelvinator, and Electrolux. Locally-produced air-conditioners have advantage over imported ones due to no customs tax levied on AC parts and components imported by local manufacturers. It also could be traded and re-exported at no import tax to any GCC countries, the same as which from other GCC countries into Saudi Arabia. That is the reason why countries like UAE, Bahrain have become major exporting countries of AC and parts to Saudi Arabia. Major Players American and Japanese manufacturers have traditionally controlled the Saudi airconditioner market. However, today Korean brands are gaining ground rapidly. LG for example is now the number one brand for air-conditioners. LG holds the largest air conditioner market share in Saudi Arabia with 22 percent, and the company looks to grab 25 percent of the market in 2007. By 2011, LG expects to solidify its leading position in Saudi Arabia with a 34 percent market share. LG is opening up a production plant in Saudi Arabia to meet the expanding demand for its air-conditioners. The new plant, the latest air conditioner production facility in

Saudi Arabia and ninth for LG in the world, is being constructed in Al Tatweer Industrial City, south of Saudi Arabia's capital city Riyadh. It is expected to start operating in the fourth quarter of 2007 with an annual production capacity of 250,000 units. LG plans to double production capacity to 500,000 units by 2011. In terms of types, American suppliers dominate the packaged and central units, which is usually associated with large construction projects. The split system is dominated by both Japanese and Korean manufacturers. Local manufacturing consists mainly of window-type units. Saudi Import The kingdom imported air-conditioners worth US$216 million in 2005, a decline of 21 percent against US$273 million in 2004. The decline in import is due mainly to the increasing usage of locally produced air-conditioners to meet the demand. Wall-mounted split unit is the main type imported by Saudi Arabia. In 2005, alone, import of this AC type was amounted at US$132 million and accounted for 61 percent of total AC imports by Saudi Arabia. The largest supplier of split units to Saudi Arabia is Republic of Korea (ROK), followed by China, Thailand, Bahrain, UAE and USA. Malaysia ranked number 11. Central unit came as the second largest type imported with value of US$66 million or 30 percent of the total AC import by Saudi Arabia. Thailand is the largest exporter of central units to Saudi Arabia. It is followed by China, USA, ROK, UAE and Malaysia. These two types collectively accounted for over 90 percent of the total import of airconditioners by Saudi Arabia. Table 1 shows the trend of Saudi Arabias import volume of air-conditioners from 2001 to 2005. Table 1: Saudi Arabias Import of Air-Conditioners Value (US$ Thousand) Item 2005 2004 2003 2002 Air-conditioners (HS codes: 84151020, 84151090, 84158121, 84158129, 84158190, 84158229, 84158290, 84158321, 84158329, 84158390) 215,966 273,433 146,779 184,523

2001

102,151

(Source: Central Department of Statistics, Saudi Arabia)

On the contrary, in 2005, Saudi Arabias imports of parts for air-conditioners recorded an increase of 13 percent over the previous year. The import growth is mainly due to the increase in demand for imported parts and components from local airconditioning and refrigeration industry which do OEM assemblies. The Saudi AC

parts import was worth US$30 million with USA as the largest supplier. It is followed by Germany, Italy, China, Thailand and ROK. Malaysia was ranked tenth. The kingdoms import trend for AC parts in the last 5 years has been increasing by an average of 21 percent. The growing trend is expected to continue, opening up more opportunities for foreign suppliers of AC parts. Table 2: Saudi Arabias Import of Parts for Air-Conditioners Value (US$ Thousand) Item 2005 2004 2003 2002 Parts for Airconditioners 30,200 26,808 20,208 19,109 (HS codes: 84159000)
(Source: Central Department of Statistics, Saudi Arabia)

2001

14,264

4.

SAUDI STANDARDS AND IMPORT REGULATION

Industrial Standards Saudi Arabian Standards Organization (SASO) is the authority which issues regulations for the industrial standards and quality of national as well as imported products. Air-conditioners and parts imported into Saudi Arabia have to be compliant to SASO standards. Certificate of Conformity (CoC) is a required certificate issued by accredited laboratories in exporting country. CoC certifies compliance of a product to the Saudi standards. Malaysian exporters of air-conditioners and parts have to obtain CoC prior to export the products to the kingdom. CoC can be issued by any laboratories accredited by the official agency like SIRIM. Export and Shipping Documentation Besides CoC, Malaysian exporters of air-conditioners and parts have to prepare the following documents for export to Saudi Arabia: